The intentional or unintentional destruction of cryptocurrency tokens, permanently removing them from circulation to affect supply.
Burning is the process of intentionally destroying a cryptocurrency to permanently decrease its supply. This is usually achieved by sending the coins to a burn address - an address to which no one has access or the private keys. Once sent to a burn address, these tokens can never be recovered or spent, effectively removing them from circulation. Burn addresses usually have a large number of repeated characters and don't look like standard addresses.
The burning mechanism is cryptographically verifiable on the blockchain, allowing anyone to confirm that tokens have been permanently removed from circulation. This transparency is crucial for maintaining trust in deflationary tokenomics models.
For instance, the burn address for Bitcoin often starts with "1BitcoinEaterAddressDontSendf59kuE", which is a valid address but it's nearly impossible that anyone owns the private key to it. Any BTC sent to this address is permanently removed from circulation.
In the Bitcoin Cash ecosystem, tokens created using the Simple Ledger Protocol (SLP) can implement burning mechanisms where tokens are sent to unspendable addresses, allowing projects to demonstrate commitment to reducing supply over time.
Burning is often used as a strategic economic tool by cryptocurrency projects to manage the supply of their tokens and potentially increase scarcity. By reducing the supply while demand remains constant or increases, the value of the remaining tokens may appreciate. This deflationary mechanism has become increasingly popular as projects seek alternatives to traditional inflation-based economic models.
Token burning serves several strategic purposes:
Binance Coin (BNB) is a notable example of a cryptocurrency that regularly burns a portion of its supply. Binance commits to using 20% of its profits each quarter to buy back and burn BNB until 50% of the total supply has been burned, thereby increasing the scarcity of the token.
Ethereum implements a fee burning mechanism in its EIP-1559 update, where a portion of transaction fees is permanently destroyed rather than paid to miners. This creates a deflationary pressure on ETH supply during periods of high network activity.
Coins and tokens can also be unintentionally burned if they are used in an invalid transaction, or if the destination address is malformed. Additionally, if access to some coins is lost due to reasons like losing the passphrase or the death of the owner, then those coins are effectively burned as well.
These accidental burns contribute to what economists call "effective supply" - the actual amount of a cryptocurrency available for trading and use, which may be significantly less than the theoretical total supply.
A famous case of unintentional burning is the loss of 7,500 Bitcoins by James Howells, who accidentally threw away his hard drive containing the private keys to his Bitcoin wallet in 2013. Those Bitcoins are now permanently inaccessible and are considered to be burned, with a value of hundreds of millions of dollars at current prices.
Research estimates that up to 20% of all Bitcoin may be permanently lost due to forgotten passwords, lost storage devices, or death of owners without succession planning. This ongoing unintentional burning contributes to Bitcoin's scarcity.
The economic impact of token burning varies widely depending on implementation. Some approaches include:
The effectiveness of burning as a value-accrual mechanism depends on market perception and the overall utility of the token. Simply burning tokens without fundamental value or utility rarely creates sustainable value.
Bitcoin Cash, while not implementing a built-in burning mechanism, benefits from the effective supply reduction that occurs across the broader Bitcoin ecosystem. The fixed supply cap of 21 million coins combined with accidental burns contributes to the scarcity model of BCH as well.
From a technical perspective, token burning implementations vary across blockchain protocols. Some methods include:
When evaluating a project's burning mechanism, it's important to verify that burns are occurring on-chain and are cryptographically verifiable, rather than simply taking the project's word for it.
In the Bitcoin and Bitcoin Cash ecosystems, the OP_RETURN opcode can be used to provably destroy small amounts of cryptocurrency by making the transaction output permanently unspendable, while also allowing the attachment of metadata to the transaction.
All terms and definitions may update as the Cryptionary improves.